Are we now entering a Japan-style deflationary period?
Asset prices devaluing (check)
Fed lowering rates (soon?)
Commodities falling (check)
Credit contracting (check)
Dramatic fall in business and consumer confidence (check)
Slowing business investment (check)
Wages stagnating (check)
Consumer spending dropping (wait 'til christmas)
Saving increasing (not yet)
Fear of dollars and banks (coming)
Improvements in production efficiency (globalization, cheaper labor, cheaper cost of goods, technological innovation, increased productivity) (check)
September 22, 2006
HousingPanic Stupid Question of the Day
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39 comments:
Gold actually performs better during deflation than inflation.
Bernanke cranks up the helicopters filled with money, drops dollars from the sky on the economy (check)
I know a lot of "experts" are saying the fed will begin to lower rates next year. Is there any basis to this other than the fed pausing for a few months?
I personally think that if the fed backtracks it will only make things worse.
the fed will lower rates because the economy will be in freefall due to the collapse of housing. I'm pretty confident pressure there will outweigh any pressure to support the US currency
In other words, pretty ugly
Duh. Helecopter Ben would never let deflation happen. Nor would Congress, the Prez, or even your mommy or daddy.
Lets face it, we live in a "feel good" society. Are you fat? That's ok. As long as you feel good about it keep eating. Can't hit a baseball with a bat? That's OK too, we'll still give you a trophy.
My point here is that the government would never allow serious deflation. When people see deflation, they see that their assets are worth less, and they frown. And honey, frowns are bad for everyone. Cause nobody spends when they are frowning. And we can't have that, can we?
Naw, the way out of this mess, besides a small pullback and leveling in home prices is inflation. Cause the government can hide real inflation numbers by lying to us through math. Cause for most of us Americans math just isn't fun :(
That way, while you get poorer every day, you don't even see it happening. And we just keep on spending....cause it feels good.
Consider:
-The dollar is worth 2/3rds of what it was in Euros just 6 years ago and there's talk of more dollar devaluation.
-A gallon of gas cost 2.5 times as much as it did 6 years ago.
-Gold has more than doubled in price in just a few years.
Much of the increases in gold prices and gas are due to the falling value of the dollar. And over time that will just stoke inflation....even moreso as the dollar drops more.
Honestly though, I'm ok with it. Its just the long slide at the end of an empire. Happened to England and the Romans at the end of their empire. Just the world rebalancing itself. Hopefully, as a nation, we don't keep going the way of 1920 German and blame everyone else for our own problems. Cause that's just WW3 and we're the bad guys.
THE DEVIL IS IN OUR HOUSE. IMPEACH!! IMPEACH!!
I agree with Keith, the fall in housing will only accelerate in 2007 as ARMs reset and people start unloading their houses.
Then rates will need to go down. They need to anyways because the yield curve is inverted.
The only problem is that as the dollar drops in value, long term interest rates will rise because foreigners will reduce their intake of dollars. As rates rise, so do mortgage rates and the vicious cycle repeats until the dollar and housing bottoms out over the next 4-5 years.
WATCH OUT BELOW!!!
As a person with zero debt other than my stardard 3y fixed mtg. my consumer confidence is sky high. Of course, I only buy what I need. You can go ahead and close all the autmakers down. Won't need one for about another 10 years, thanks anyway.
A point on the Euro vs USD, the dollar hasn't even re-tested its 3 yr low of 1.36 to 1. When that happens, and a new support/resistance band starts to form around 1.35 to 1.5, then we have a true dollar devaluation. Otherwise, we're simply in another cyclical bear pattern.
So I wish you fellows would get the facts straight and not try to oversell the USD as the new Lira/Peso idea. Give the doom/gloom scenario another decade to play itself out.
For now, the USD is stable which would more likely lead to a deflationary cycle for hard assets like RE and inflation for others like perishables. If you have cash and precious metals (gold, silver, but not the commodities) then you should be honky dory for a while.
Great! Print more money, soon enough we will not have to buy toilet paper, as the toilet paper will be in your left or right pocket.
Whop,
The fed may certainly try to inflate but it's powers are not absolute. What do you do after interest rates are at zero, like in Japan, and deflation just keeps going? I can't say I fully understand our fractional reserve system but I've read several experts who argue that the reserve rate is now effectively zero as well. At some point the fed is pushing on a string.
If and when people simply refuse to spend, or borrow at any interest rate, then deflation is inevitable. If and when we see a general consumer buying strike, like the more specific home buying strike we're now living in, then we may see a depression that no one can do anything about. Again, I'm no expert but Mish makes a hell of a lot of sense to me.
Did you notice what WalMart did to prescription drugs yesterday? Isn't health care supposed to be the last bastion of inflation? And higher education too. Have you seen the MIT open course ware?
We are so spoiled here, from a generation of luxury, that we will only scrimp and save when the herd has finally smelled fear.
Sniff. Sniff.
It will look like deflation, the media will talk about deflation, the government will say they are fighting deflation, but it will really feel like inflation to the average american who will continue to pay more for everything they need to purchase.
Will not be fun.
It might be too early for deflation. I think deflation ususally comes at the end of the housing downturn, when we are in deep in a buyers market.
BTW, Starbucks raised prices on their coffee and coffee drinks today.
Others will follow.
anonymous @ 11:16:51 (very first comment in this thread)said
"Gold actually performs better during deflation than inflation."
1. Pick a handle, any handle, so people can talk to you.
2. Sources? Evidence? Arguments?
Joel: "Or was that just bullshit?"
Miles: "That was just bullshit, Joel. I'm surprised you believed me."
Risky Business
Deflation it will be.
And no, there won't be inflation of consumer goods either - the prices of these will also deflate, as will all assets and commodities, including gold.
No one understands a deflationary cycle, because few have even experienced a middle-of-the-road recession, as the last one we had was in 1991. Fewer still remember a severe recession, as the last one of those was in the early 80's.
We're hosed.
The Fed can play games with the money but lowering interest rates and weakening the dollar will only cause increase in prices for foreign goods, the most important of course being oil.
Luckily we have plenty of coal, and our electrical power plants mostly run on that. At least when the system collapses we'll still have electron gold to power our IPODS.
Anon Friday, September 22, 2006 3:07:32 PM,
Non-discretionary consumer goods will go down in price in relation to gold and some foreign currencies. In relation to dollars, though, they will not. We have a fiat currency for that reason, to short circuit deflationary cycles by printing more money. Will that end at some point? Maybe, but we're a long ways away from that happening. Until it does, the government will use the power of fiat currency.
Same thing with commodities, they will go down in price in relation to gold and some foreign currencies due to falling demand, but their prices in dollars will continue to go up.
Commodities, of course are more volatile than stocks, they always have been. Which is why calling a 20% price drop in a commodity a bear market is erroneous. They have much higher betas than broad based stock indexes. They might have big corrections, like what we've seen with natural gas, but long term (next 5-10 years) they will continue their bull market when priced in dollars. Just don't attempt to swing trade commodities unless you can handle alot of risk.
"Then, I guess to "leave 'em laughing", they quote two economists named Stephen King and Ian Morris. While these guys may be real hotshots about modern economics as they know it, they don't know squat about modern economics as I know it, as they prove when the article continues "In the last recession, a massive round of tax cuts and a super-loose monetary policy helped the economy get a second wind. Americans will have no such luck this time around, King and Morris warn." Hahahaha! The American government can't have another round of tax cuts and super-loose monetary policy to juice the economy? Hahaha! Who's going to stop them? You? Hahahaha!"
Richard Daughty
...the angriest guy in economics
The Mogambo Guru
>>Non-discretionary consumer goods will go down in price in relation to gold and some foreign currencies. In relation to dollars, though, they will not. We have a fiat currency for that reason, to short circuit deflationary cycles by printing more money. Will that end at some point? Maybe, but we're a long ways away from that happening. Until it does, the government will use the power of fiat currency.
Same thing with commodities, they will go down in price in relation to gold and some foreign currencies due to falling demand, but their prices in dollars will continue to go up. <<
If we were Japan, that might be true. But we aren't Japan. The US economy drives the world economy.
As we deflate, so will Europe and so will Asia. WORLD demand for all consumer goods, commodities and assets will decrease, driving down prices.
China will be affected most of all - as they are now the world's producer of consumables. Their government will attempt to 'hang on', as they 'invest' their dollar reserves in more questionable capital projects to calm the masses and support their increasingly urban population.
But all economies that have chosen the 'export driven' model will be crushed. That would include Germany and Japan.
Great comment, Tom. Too true.
Anon, Friday, September 22, 2006 3:41:13 PM
You're apparently not getting what I said. Yes, demand will go down and because of that prices will go down in terms of gold and some foreign currencies. In terms of dollars and other currencies that lose value over the next few years, though, it won't happen.
Here's why: "The application of supply and demand concepts in macroeconomics is somewhat complicated by the fact that supply and demand analytical concepts are often predicated on the notion of a stable unit of account via which prices can be observed. In Macroeconomics this assumption can not be taken for granted as currencies themselves are subject to dynamic supply and demand forces that influence quantities and prices of the currencies themselves."
Deflation is not lower prices! It's a decline in the money supply. Do you see any evidence of that? Hell no, we're running record deficits! Asian countries are tripping over themselves to loan us money so we can continue to buy their crap.
If for some reason that spring dries up, Helicopter Bernanke stands at the ready to hand out money. Bread and circuses, it's all good...
Bubbleshanker, those are some good ideas. But I'm afraid that short of a revolution, not a single one has a snowball's chance in hell of becoming law.
Japan deflation will be here soon
(housing prices down - restaurant prices down at major chains). . .the Fed will be "pusing on a string" to inflate the economy. . .remember zero rates in Japan??? (I believe they even went negative). . .10 years of downturn.
Mark in SD
Bernanke has stated many times that the Fed will not allow a deflationary cycle (like Japan in the '90s) to take hold in the U.S. economy. Falling prices by themselves do not equal deflation. They have to be the result of a steady decrease in the money suppy and lower productivity.
Economic inflation is easy to create with today's fiat money systems and electronic banking and commerce. The only deflation we might see would be the result of a cataclysm or a global war, and if it comes to that none of this bullsh_t matters, does it?
Hey everyone, the US dollar is still strong.
On 12/31/04, its was 1.36 USD = 1 Euro, today it's 1.27 USD = 1.
Yes, it'll never be like 04/28/03, 1.1 USD = 1 Euro ever again, but that's the nature of an overall secular bear market.
For Brazil, 1 USD could buy 1.9 Real on 1/1/01 but then by 8/2/02, 1 USD could buy 3.4 Real. Fellows, that's the nature of a true devaluation scenario.
Bernanke cranks up the helicopters filled with money, drops dollars from the sky on the economy (check)
++++++++++++++++++++
Value of the dollar quickly tanks, and our economy along with it (check)
Hyperinflation ensues, causing my Starbucks latte to cost hundreds of dollars (check)
Deflation sets in finally, and everything is MUCH worse than if Ben had stayed away from his helicopter in the first place (check)
The dollar is still strong...to quote the Mogambo Guru: hahaha!
2 data points (as you used for an example) does not make a truth.
Here are the 5 yr charts for the 6 other major world currencies in relation to the dollar.
Japanese Yen
Euro
Canadian Dollar
British Pound
Australian Dollar
Swiss Franc
For the dollar, the trend is not it's friend.
1) Cut 30% of all Fed & State workers.
2) Cut Social Security, anyone under 40 gets a one time 50k check, people over 40 get 60% of what was promised.
3) Do the same with medicare.
4) Go to a flat tax of 15%, no deductions for anyone.
5) Any company outsourcing jobs will pay double the tax rate on any products shipped back to the US.
Just some thoughts.
Was there not a proposal, to something like this ?? HR2 i think?
excuse me found it HR.25, Great read
http://tinyurl.com/eeglm
"2 data points (as you used for an example) does not make a truth.
Here are the 5 yr charts for the 6 other major world currencies in relation to the dollar."
Did I not say that it's in a secular bear market?
In a secular bear market, the main asset class that's trending down would go through periods of a downward trend, followed up an upward trend, and so on with each rung being lower than the prior major wave down. As of now, the USD hasn't even re-tested the three year low from the last wave down so this range trading will go on until the next band is formed, 1.35 to 1.5 USD to 1 Euro.
That's a far cry from what happened to the Real, Peso, or Lira. So in contrast, yes, the dollar is still strong. That's why people who bet on a singular vision will never be successful currency traders. Five to ten years from now, however, the situation will be different.
I guess it all depends on what your definition of "strong" is.
Compared to the Peso or Lira, sure.
Compared to the Euro, Pound, CND $, AUS $, Sw Fr, and Yen.....not so much.
It's all relative.
"Compared to the Euro, Pound, CND $, AUS $, Sw Fr, and Yen.....not so much."
If you look at '95 to '00 as a secular bull market for the USD, then for the most part, when 0.8 Euro = 1 USD, during the dollar's peak then perhaps the first phase down, 1.1 Euro = 1 USD was an authentic correction from an overstated peak. Therefore, the bear market's first wave down's peak of 1.36 Euro = 1 USD was more the precursor to a longer term bearish cycle which is why we're straddling in that (1.25 to 1.35) range for months/years, at a time, until the next trading range is found which would be another wave down.
All and all, for a currency with practically no fundamentals behind it, as oppose to the South African Rand (w/ commodities, gold, etc), its position is still pretty strong from a forex pov, internationally.
That's interesting that Faber is saying that now. A year ago, he had this to say:
"Yes, I would actually argue that if you had a high period of inflation such as we had for the last half century since the 1950s – first in consumer prices and then especially in asset prices – then some deflation may be necessary to redress some of the imbalances that have been created. But of course, deflation, if you think of it, is disastrous for the rich people, because it means stock prices go down, it means real estate prices go down, so the rich class benefits the least. And as I mentioned in Japan: the rich got hit. I mean, if you look at the pattern in Japan and if you go, today, to Japan you would think that Tokyo is a boom town: you would never think that the stock market is down 70% from the highs in 1989; and you wouldn’t think that property prices are down 70% from the highs in 1989. But a normal family, their wages are the same as in 89, 90. Maybe their wages have actually even increased by 1 or 2% per annum, but they can now rent an apartment 50% cheaper than at the time; they can join a golf club for 80% less than in 1990; and they can buy consumer goods cheaper, because of cheap imports from China and so forth. So, actually, the typical Japanese household isn’t complaining about this deflation, and it’s cash money, and that you have to see."
and this:
"Yes, we are in an extreme casino society and it can become bigger. But one thing is sure: one day it will end badly when this whole financial bubble and asset bubble is deflated very badly. What the catalyst to that will be I don’t know. The Federal Reserve and other central banks of the world will of course do whatever is possible to keep this bubble alive, simply because to deflate the bubble would be economically extremely – and I repeat, extremely – costly. So the moment the Fed sees a crisis – whether it’s the S&L crisis in 1990, or the Tequila crisis in 1994, or LTCM, or they sometimes totally misjudge events, like Y2K – they just print money like there is no tomorrow. And the next time the economy cools down, presumably because the housing market no longer goes up – it doesn’t need to collapse, just no longer going up – or because of an implosion in China, or a slowdown in China, or whatever may happen, you can be sure the Fed will be there to print money, and the other centrals banks the same.
The first great example in history of printing money in order to boost economic activity was undertaken by John Law in 1719. It was called the Mississippi Scheme and it is interesting to read about it because what the central banks are doing today is exactly what he did at that time, namely, to print money and try to stabilize asset values – in that particular case of his Mississippi company. But of course, it totally failed and the whole scheme eventually collapsed and the crisis ensued. And that will be the end result. But how do we get to the end result? Robert Prechter says that we will get deflation. Yes, I am sure he will be right, but before deflation we can get maybe a wisp of deflation, then massive money printing, and first hyperinflation, or very high inflation rates, and then deflation. But I doubt we will go just from where we are today into serious deflation. I think first, the central banks, led by helicopter commander Mr. Bernanke, will drop dollar bills onto US households. They may have to retrieve all the helicopters that are in Iraq to do the job, but they’ll do it."
Faber: Inflation / Deflation
which basically explains that the Rich will never allow deflation because they become the biggest losers, therefore what do you think is going to happen in the US: we will try to inflate our way out of this thing.
I defintely agree that emerging markets are not a good place to be. But I don't know how he gets from that scenario to seeing a good market in US Tech, though. I can see Large Caps as a safe haven, but Tech? I just don't see it.
And commodities. If we try to inflate our way out of this mess as he is obvioulsy thinking, I don't see how that doesn't bring about a continuation of the commodities bull, especially for gold, silver, and oil.
paint, less emphasized in the article you linked to was Faber's bullishness on Japanese equities. The more I think about that, it's an pretty good play. There is very little excess in that market compared to many others, which makes for a pretty good risk/reward ratio.
>>tabasco jenkins said...
You're apparently not getting what I said. Yes, demand will go down and because of that prices will go down in terms of gold and some foreign currencies. In terms of dollars and other currencies that lose value over the next few years, though, it won't happen.<<
I did get what you said.
I think you are wrong.
Nothing Japan-style about it!
When it comes to F--kin stuff up right.....only in America!!!!!
"The fed may certainly try to inflate but it's powers are not absolute. What do you do after interest rates are at zero, like in Japan, and deflation just keeps going"
when interest rates hit zero you buy the long bond
easy inflation -they are probably doing it already
Deflation, Japan etc??
The main difference between the US and Japan is that unemployment is virtually unheard of, and the nation saves about 7% per annum.
The last time the US had zero unemployment and savings of 7% was about 1955.
Deflation, forget about it, it'll never happen.
The helicopters thing is aligorical, $25k tax rebate cheques and $1k grant for that new baby, home improvement grants where the home owner pays 10% of the cost. They'll call it urban renewal, and this is a fancy name for spending $billions on doing up rough neighbourhoods that will be just as bad as they ever were, within 2 years.
The bottom line is money gets pumped into the economy, lets face it even hookers and drug dealers got to buy stuff!!
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